Austerity era 'could last to 2018'

The era of austerity could last until 2018 as George Osborne is forced to extend spending cuts still further into the next parliament, a respected economic think tank has warned.

The Institute for Fiscal Studies (IFS) said that the Chancellor may have to push out the current squeeze on public spending to 2017/18 and find another £11 billion from cuts or tax rises on top of the further £8 billion reduction in welfare spending already mooted.

Having initially planned to eliminate the structural deficit by the time of the next election in 2015, Mr Osborne has already had to signal further real terms cuts of 2.3% in Whitehall spending up to 2016/17 and the slashing of the benefits bill by another £8 billion (at today's prices).

But under the IFS's "relatively pessimistic" scenario for the future of the economy - under which the recent deterioration in growth prospects and tax receipts turns out to be permanent - the Chancellor will be forced to announce even more bad news for British taxpayers if he is to hit his "fiscal mandate".

In a report ahead of Mr Osborne's Autumn Statement next week, the think tank predicts that in any case he is on course to miss his other fiscal target - for national debt to be coming down in 2015/16.

However, its analysis does not take into consideration the recent change to the way the Government finances interest payments on debt from the Bank of England's gilt purchases - a move expected to make the so-called supplementary fiscal target easier to meet.

The IFS urged Mr Osborne to instruct the independent Office of Budget Responsibility to do the same in its forecasts because the change would not "directly materially change the long-term outlook for the public finances". It said that, with borrowing set to reach £133 billion for the current financial year, £13 billion higher than forecast, Mr Osborne may be forced to abandon the 2015/16 debt target.

Carl Emmerson, deputy director of the IFS, said: "Since the Budget, the outlook for the UK economy has deteriorated and Government receipts have disappointed by even more than this year's weak growth would normally suggest. As a result, the Chancellor might find himself having to abandon one of his fiscal targets.

"If much of the additional weakness this year feeds into a permanently higher outlook for borrowing, then in order to comply with his other fiscal target Mr Osborne would need to announce yet more tax rises or spending cuts for the next parliament in next week's Autumn Statement. In that case the planned era of austerity could run for eight years - from 2010/11 to 2017/18."